Total Outlay Method, Business Economics Assignment Help

Total Outlay Method

This method is first used by Marshell. According to this method new price and new total expenditure are compared with the original total expenditure for deciding the nature of elasticity of demand. In this context three situations are possible.

(i) Unit elastic- Demand is unit elastic, when the total outlay does not vary with the change in price of the commodity. It results in:

(a) With the price, the demand for the commodity increases.

(b) With the rise in price demand contract but total outlay remains unchanged in both the above two situations.

(ii) More than unit elastic- demand is more than unit elasticity in the following cases when:

(a) With a fall in price total outlay increases.

(b) With arise in price total outlay falls.

In short if price and total expenditure move (change) in opposite direction elasticity of demand will be greater unity (Ed > 1)

(iii) Lesser than unit elasticity- the demand is lesser than unit elasticity or elastic when :

(a) With a fall in price total outlay falls. Or

(b) With a rise in price total outlay also rises.

In short if the demand and total expenditure move (change) in the same direction elasticity of demand will be less than unity (Ed <1).

Measurement of elasticity of demand by total outlay method:

Situation Price ($)

Demand Total exp. ($) Elasticity of demand

I 6 7 42 Ed = 1

7 6 42

II 6 7 42 Ed > 1

8 5 40

III 6 7 42 Ed < 1

10 6 60

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